Macroeconomic Thought and Rational Expectations Flashcards

Flashcards on Macroeconomic Thought and Rational Expectations

Keynesian Economics

Economic theories developed by John Maynard Keynes to combat the Great Depression, emphasizing the role of government intervention.

Multiplier Analysis

A component of Keynesian economics that examines how an initial change in spending can lead to a larger overall change in national income.

Liquidity Preference Theory

Keynesian theory explaining that interest rates are determined by the supply and demand for money.

IS-LM Model

A model developed by John Hicks that combines the goods market (IS curve) and the money market (LM curve) to analyze macroeconomic equilibrium.

Liquidity Trap

A situation described in the IS-LM model where monetary policy becomes ineffective because interest rates are already very low.

Output Gap

The difference between actual output (Y) and potential output (Y*). Can either be positive (inflationary) or negative (deflationary).

Phillips Curve

A curve that suggests an inverse relationship between inflation and unemployment, which was challenged by the stagflation of the 1970s.

Stagflation

The simultaneous occurrence of high inflation and high unemployment, which challenged traditional macroeconomic theories like the Phillips Curve.

Rational Expectations Hypothesis

The idea that economic agents form expectations about the future that are consistent with the predictions of the economic model they use.

Policy Ineffectiveness Proposition

The proposition that if economic agents anticipate a policy change, they will adjust their behavior in a way that neutralizes the intended effects of the policy.

Efficient Markets Hypothesis (EMH)

The hypothesis stating that asset prices fully reflect all available information, making it impossible to consistently achieve above-average returns using that information.